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8 Cards in this Set
- Front
- Back
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What is the law of demand? |
As price increases, quantity demanded decreases and vice versa, ceteris paribus. |
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Define and calculate total utility, marginal utility, and average utility when given data. |
Total utility is the total amount of utils recorded for a given good or service at each point. It is calculated as the total amount of utils felt after experiencing each number of goods (1 good, 2 goods, 3 goods, etc.). Marginal utility is the additional satisfaction (change) in eating one more unit of a good or service. It is calculated as the difference in utils from one more unit of something to the original amount before that (G2 – G1 = MU). Average utility is the average amount of utils felt per good/service. It is calculated as (TU/#G experienced). |
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State and identify the law of diminishing marginal utility and the law of negative marginal utility. |
Diminishing marginal utility is a condition that occurs when marginal utility declines as consumption increases. The law of negative marginal utility is when the consumption of an additional item decreases the total utility. |
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Explain the relationship between total utility, marginal utility, and average utility. |
When TU↑, MU+. If TU↓, MU-. MU↓ and AU↓ when consumption↑. |
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State the utility-maximizing rule (consumer equilibrium?). |
A consumer optimum is the combination of goods and services that maximizes the consumer's utility for a given income or budget; the “biggest bang for your buck.” It is the highest MU/P (utility per dollar). You want the MU/P to be equal between goods/services purchased. |
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Use the utility-maximizing rule to determine a consumer’s spending habits given utility and price data. |
You would calculate utility per dollar for each item purchased and see if their MU/P were equal to each other. If not, the consumer has not reached a consumer optimum and needs to change their spending habits. |
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Explain the diamond-water paradox and describe why the price is related to marginal utility. |
The diamond-water paradox is a paradox that explains why water, which is essential to life, is inexpensive, while diamonds, which are inessential to life, are expensive: water is less expensive because there is less MU for it since it is common; diamonds are more expensive because there is more MU for them since they are rare. However, the TU (and consumer surplus) of water is greater than the TU of diamonds (because there is a higher demand for water and it is essential for life). |
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Explain why a cash gift will give the receiver more utility than a non-cash gift costing the same amount. |
It is more versatile; the receiver can spend it on any non-cash item, whereas the non-cash gift is simply that gift. |
